Blackrock Also Sees Opportunities in High Yield Bonds

From Blackrock

The Sell-Off Continues, But an Opportunity Appears

October 15, 2014

by Russ Koesterich

of BlackRock

• In recent weeks, investors have been contending with two trends: anxiety over a change in Fed policy and evidence of a slowdown in the global economy.
• While global growth is likely to remain below historic norms, it is not collapsing. This suggests that investors should be positioned for a slow growth environment, not another recession.
• This, in turn, implies taking some selective risk in asset classes that have become less expensive as a result of the sell-off.
• One example of an asset that warrants another look: U.S. high yield bonds......

At the same time, the current environment presents the opportunity to take another look at asset classes that had sold off and now look more attractive. One such asset class that had come under pressure, but is now looking relatively appealing, is high yield bonds. The yield difference between high yield bonds and higher-quality, lower-yielding U.S. Treasuries (known as the spread), has widened out to the highest level in a year. This indicates high yield bonds offer better value and yields now than just a few weeks ago. Given that corporate America remains strong and default rates low, high yield now looks likely to provide a reasonable level of income relative to the rest of the fixed income market